Friday, August 26, 2011

Kevin Drum writes about the possibility that American growth is now constrained by the growth in the oil supply. That may be true in practice, but I would argue that there’s no reason to believe it should be true in theory.

After all, consider the gasoline tax. Right now, we levy a flat per gallon fee, and that fee is too low to meet our infrastructure needs. We ought to raise it. But instead of raising the flat per gallon fee, would could change it to a percentage tax like a regular sales tax. That way, an increase in the price of oil would lead to an increase in the price of gasoline which would lead to an increase in the gas tax. On its own, that would make the situation even worse. But the increase in tax revenue could be used to offset something else. For example, the payroll tax could be set to fall automatically any time high oil prices led to “extra” gas tax revenue. That way oil price spikes would generate an automatic subsidy to production and employment.

That’s wonky and not going to happen, but it would work!

This doesn't make sense. One way to see this is to note that a rise in oil prices inevitably removes purchasing power from the pockets of American consumers and instead gives it to people in OPEC countries (and Texas!). Coupling a shift in the tax burden from payroll tax to gas tax to this, doesn't change that fact one whit. If anything it's likely to worsen the problem since the gas tax is more regressive than the payroll tax and thus will differentially hurt poor consumers who have a higher preference to consume versus save.

Or look at it another way: the real problem with an oil price spike is a physical one - there's simply less energy than is needed to power all the economic activity that would otherwise occur. All economic activity requires some energy - and many critical ones can only be done with oil given current capital stock - and if there isn't enough then something will have to not happen that otherwise would have been done. And again, fooling around with the tax structure won't create a single extra joule of energy supply.
That said, this part:

The technology to create less gasoline-intensive communities is available to us but right now we do very little to deploy it.

I wholeheartedly agree - with the caveat that turnover in the built infrastructure is very slow so that one cannot plausibly make large changes in it quickly. But certainly we could be doing far more than we are.

7 comments:

Interesting. I think exactly the opposite of Matt Yglesias: high oil prices may be a constraint in theory, but that has not been tested yet. (Hamilton notwithstanding.) Consider:-

All the evidence is that the USA's per-capita recession* is due to lack of aggregate demand. In turn, that is due to a debt overhang, primarily in housing.

Second, fuel consumes a small fraction of household budgets, and less than half (maybe less than a third) of fuel costs are sent abroad, the remainder being gas station wages, truck-driver wages, etc., etc. So the effect of the cost of oil is less than might be thought, overall.**

If households were not prevented from taking on more debt (as in, e.g., 2004), a doubling or tripling of fuel costs would have a small impact, but growth would still be possible.

Given the price inelasticity of fuel demand, the growth rate may actually increase temporarily, as households take on more debt to replace gas guzzlers with more efficient vehicles, and as producers, seeing the demand, increase utilization and take on debt to increase investment.

* Per capita recession: 1.0% GDP growth, less 1.0% population growth, less 0.7% productivity growth (four-fifths of which is captured by the top 10% of income earners - profit receivers), adds up to negative growth in per capita income for the vast majority.

** It is true that most of the increase in oil price would be converted to profits, i.e., be highly concentrated in the population. But again, in normal times that would be more quickly corrected by investment.

I can't think of a time that I wasn't generally in favor of raising fuel taxes. The elasticity of fuel demand might be low, but it's not zero. Drumm's scenario would likely cause a lowering of fuel demand, or would at least be an incentive to developers of alternative sources of fuel and energy in general. That would mean less wealth transfers to Texas and other inhospitable regions than would occur otherwise.

As far as the payroll tax is concerned, I don't think you could get more regressive than going to zero at $60k a year.

A percentage based sales tax on gas is of course stupid, but a serious volume based one is what the US should put, if it wasn't so commited towards total economic suicide.And such a tax doesn't put more money in OPEC pockets of course, it removes some.The idea behind such a tax, even more than a budget aspect, being to push efficiency choices in the technical infrastucture in general, cars fleet in paticular.You can say it's too late or say "why bother", nonetheless it is the thing to do whatever the position regarding oil production history.A car with double current effciciency is perfectly possible, cheaper and more realistic than hybrids or electric in most cases.But clearly the US has "given up" about its future, only rational conclusion.

"And again, fooling around with the tax structure won't create a single extra joule of energy supply." - I think you meant to restrict that to gasoline tax structure, which is what you were talking about before. It seems like you could fool with the tax structure and at least temporarily increase energy supply.

Critical economic activity that requires gasoline will not lose any supply. If the activity is critical than the cost of the fuel will just get passed along in prices. But most US gasoline consumption isn't critical. If someone has to leave their jet ski parked for the season, the rest of the economy won't miss that activity much. If someone else has to carpool and loses 15 minutes of their time that way every day, they'll also be reducing congestion by a bit and might get some useful work done instead of driving.

And again, we only reduce oil consumption through higher prices or lower income. We respond to higher prices by making efficiency investments to reduce consumption of the more expensive resource. What he's proposing would work to do that - make the resource more expensive, and provide more money to make efficiency investments. It would work even better if he tied the investment money directly to the resource you want to use less of - in this case, maybe investments in rail, funding for transit systems, funding for bike lanes, and tax credits for more efficient vehicles (free commuter bikes!).

That seems to be pretty much what Europe did, and it seems to have worked pretty well. Why do you think it wouldn't work here? The alternative is more unemployment to reduce demand. Is that really so much better?

An alternative to immediately raise fuel taxes sufficiently to make a difference, considering fuel price inelasticity, could be if both parties in the congress stated the taxes should be raised to European levels consecutively during a ten year period.

"less energy than is needed to power all the economic activity that would otherwise occur"

I live someplace that is already "built right" for non-car transportation, and the cost (parking, traffic jams, aggravation) of driving into Boston/Cambridge is plenty high (street meters are $1/hour, if you can find one). By built right, I mean dense, and flat enough; appropriate use of paint could make things nicer for bikes, but there's no need (or place) to lay down new bike-specific asphalt.

If the commuters and shoppers who drove from neighboring communities instead used electric scooters or bicycles (*), they would arrive at their destination almost as quickly, and in some cases, more quickly, depending on traffic, parking, and speed of scooter/bike. The resulting economic behavior would be nearly identical, except for money not spent on fuel and parking (and various other auto overheads).

So I am puzzled. On the one hand, there's plenty of economic activity that would continue unabated without using an auto. On the other hand, in the place where this could most easily happen, we still see scads of auto use. My benchmark for being disappointed is the Cambridge/Fresh Pond Whole Foods parking lot; despite being plenty-accessible by bicycles, it is almost always filled with cars, many of them bearing eco-oriented bumper stickers. (I should count hybrid autos someday, just for grins.)

(*) e-scooters and bikes are vaguely equivalent in their net fuel use, since it does take food to fuel a bike, the energy required to roll a scooter is not that much higher than a bike. E-scooters are generally faster, and correspondingly somewhat less safe, but their main bug/feature is the lack of exercise/sweat. Losing the exercise benefit is far more dangerous than bicycle or scooter crash risk.

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I'm a scientist and innovator in the technology industry, with a broad range of interests and experiences. I have a Physics PhD, MS in CS, and have done research, lived in cohousing communities, run a business, and designed technology products. Professionally, I have mainly worked on computer security problems. Currently I'm Adjunct Professor of Computer Science at Cornell, but this blog represents my views only.
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